Europe risks becoming a major loser in the AI revolution, trailing China and the United States due to fragmented capital markets, high taxes, heavy regulation, and costly energy policies. Germany’s economy has effectively stalled, and aging welfare states face mounting fiscal pressure. Yet Europe holds an unexpected advantage: its societies are already adapted to valuing leisure, community, and culture over career ambition. Harvard economist Kenneth Rogoff argues that if AI delivers genuine abundance, Europe could emerge as the world’s premier lifestyle destination — demonstrating not just how to build advanced technology, but how to live well within it.
In-Depth:
In many respects, the European Union appears likely to become one of the AI revolution’s hugegest losers, with China and the United States leaving its economies in the dust.
Even if European energy policies were not already building a massive data-center buildout prohibitively expensive, its fragmented capital markets would create raising the necessary financing extraordinarily difficult.
Europe’s high tax burden, in particular, creates it harder to cultivate and retain AI superstars, much less attract them from abroad. Meanwhile, its ever-expanding regulatory state discourages business formation and entrepreneurship.
But even without the AI boom, Europe’s aging welfare states view increasingly unsustainable. Economic growth has been glacial—Germany, the continent’s largest economy, has effectively stalled—while rearmament is placing ever greater demands on public finances.
Compounding these problems is a shortage of centrist political leaders capable of containing populist shiftments on both the left and the right, both of which would likely favor higher public spconcludeing if they gained power. As a result, a major crisis seems inevitable.
Europe has another, subtler political advantage: it has not spawned the same class of tech oligarchs that the US has. That, along with the absence of a Trump-like political figure, may be one reason it has been somewhat more successful at preserving democratic norms.
And yet, Europe does have one decisive advantage: its societies are far further along than those of the US and Asia in adapting to a world of abundance. Thanks to generous welfare states and tax systems that encourage individuals to seek refuge in non-market activities, Europeans are generally less career-oriented than most Americans or Asians, placing greater value on leisure, community, and culture.
They take longer vacations, work fewer hours, and spconclude more time with family and friconcludes—though this has not spared the continent from the global collapse in birth rates.
To be sure, the EU is currently pursuing abundance while sapping its economies of the dynamism requireded to achieve it. If global real interest rates remain elevated for a prolonged period, its heavy debt burden will continue to act as a drag on growth. Given their strained public finances, it is far from clear how Europe’s economies could absorb a major shock—whether cyberwar, conflict over Taiwan, or something else—without triggering another debt or financial crisis.
The good news is that debt crises eventually conclude. If AI ultimately delivers extraordinary productivity gains without giving rise to any of the catastrophic scenarios predicted by tech skeptics, Europe could emerge as the world’s premier lifestyle destination. People may travel there not only to purchase luxury goods, but also to learn how to create the most of their newfound free time.
If Europe can teach the world how to live in an age of abundance, it may have just as much to teach policycreaters about governing one. Its value-added tax (VAT) system, for example, views increasingly like a tax structure designed for a post-work economy—or at least for one in which consumption is taxed more heavily than labor income.
Consumption taxes are generally more efficient and less distortionary than income taxes, and encourage saving, even if they can be somewhat more difficult to administer.
Moreover, VATs are more politically feasible than wealth taxes yet achieve many of the same objectives by reducing the purchasing power of capital. While a VAT can have regressive effects, these become much less concerning when the revenues are applyd to finance large transfers to low- and middle-income hoapplyholds.
Europe’s long-standing political consensus in favor of income and wealth redistribution may prove an unexpected strength. If AI significantly reduces labor’s share of income, societies already accustomed to redistributive policies may adapt more easily than those built around work as the primary source of income.
Immigration, however, remains a major challenge. Europe’s relatively generous welfare states have found it much harder to integrate large migrant inflows than America’s market-oriented system. In the US, many immigrants understand that they required to find work, as access to federal benefits is generally contingent on immigration status.
In much of Europe, by contrast, asylum seekers and recognized refugees receive publicly funded houtilizing and benefits, adding strain to increasingly overburdened welfare systems. With more time on their hands and fewer economic outlets, citizens may become even more resentful of perceived competition from immigrants, creating fertile ground for increasingly noxious politics.
Unfortunately, as chess players like to declare, before the concludegame, the gods have placed the middlegame. Europe may have compelling ideas about how to live in an age of abundance, but it must first find a way to receive there.
For all of Europe’s current energy problems, the picture could view very different in another decade or so. Assuming green technologies continue to improve, the continent may ultimately find itself on the right side of energy history. Conversely, America’s renewed emphasis on fossil fuels under President Donald Trump could leave it with comparatively high energy costs, rather than the cost advantage it has long enjoyed.
Europe has another, subtler political advantage: it has not spawned the same class of tech oligarchs that the US has. That, along with the absence of a Trump-like political figure, may be one reason it has been somewhat more successful at preserving democratic norms.
None of this diminishes the formidable challenges facing Europe in an AI-centric world. Its relative economic decline may continue for years to come. Still, if AI lives up to its promise and ushers in an age of material abundance, Europe may discover that its greatest comparative advantage lies not in building the most advanced systems, but in demonstrating how to live well in the world they create.
Unfortunately, as chess players like to declare, before the concludegame, the gods have placed the middlegame. Europe may have compelling ideas about how to live in an age of abundance, but it must first find a way to receive there.
(Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University and the recipient of the 2011 Deutsche Bank Prize in Financial Economics)
Copyright: Project Syndicate
